I like the thinking of both Bill Ackman and Ray Dalio. Maybe neither of them need my input. But since I wasn’t at the conference, I’ll inject myself this way. I’m wired as a value investor. So, while I’m open to seeking the Truth about my blind spots, it’s going to be hard to get me to adopt a whole new philosophy.
Not sure how Bill Ackman responded to Ray Dalio’s turn-around question about bear markets, but here are a few thoughts on how I might have responded:
Turning $165 Billion ship in a bloody “bear market” may be like turning the Titanic. Those “liquid” securities might or might not be so liquid; better hope the computer made the correct choices. Liquidity is a tricky thing. Also, I know Bridgewater performed pretty well last go around. What’s different at Bridgewater today versus last time?
I don’t think so much about securities in terms of “Bear Market” but rather “Opportunity Market.” The bear market dilemma is investor emotions (fear and panic), leading to investor withdrawals; the biggest obstacle to taking advantage of “Opportunity Market.” That’s why Pershing, for instance, recently converted a large share of capital to permanent capital; so institutional investors don’t obstruct the pouncing on incredible buying opportunity in the future.
Is Bridgewater an open end investment or closed end investment? When the fear and panic occur, you may act rationally, but will your investors (your capital) act rationally? It will be tough enough turning the Titanic, but trying to load investors on the exit Lifeboats may be too much.
We don’t view investments as “bets” or “trades”, correlated or uncorrelated, for that matter. They are investments in the sense that we own a fractional interest in the underlying cash flows of the securities we own. I suppose since we own a lot of underlying “cash flowing”, it’s all correlated. I never met anyone who objected to correlated cash flowing.
So, if the value of securities temporarily decline (a “bear market” as some like to call it) we view that, interestingly, not as cause for fear or panic, but as a “Sale” or a good thing. It’s an opportunity to buy more of what we like at better prices, with the confidence of knowing that over the intermediate term the cash flows and capital allocation decisions made – and security price – will take care of itself. If not, catalysts have a way of presenting themselves or we can become a catalyst to unlock the value… if we desire liquidity. Some great long term investments have been made just shrinking the cap of undervalued companies, then once that’s been exhausted, unlocking it. We’re not focused on monthly or even yearly returns, but multi year returns; which is why matching the stability of capital to the investment philosophy or style may be more important than the “bear market” question. Forced liquidation/redemption is one managers problem and another managers opportunity.
AIG is an example of a “bear market in a single security”:
The primary reason investors avoided AIG when it was 50% of Book Value, was the government would be a constant seller and keep the stock price down in the short term.
I thought not buying because the government was going to be a huge seller was the most idiotic thing I’d ever heard. I put it in these terms:
Question: If you and I owned a building 50/50 and it’s worth $100 million and you told me IN ADVANCE that, for political or whatever reasons, you were willing to sell me your 1/2 of the building at 50% OF ITS VALUE, in periodic increments over the next 2-3 years (letting me have time to get the cash together from outside sources and/or use cash flow from the building!), would that be a good or bad thing?
Answer: I’d be wondering why I am so lucky to have partnered with such an idiot, who is going to sell me large pieces of my building at a huge discount! I would keep my mouth shut (not make fun of you or rub it in your face), but I would sell every other asset I owned at as close to full value as possible (which AIG did, selling non-core assets), reallocate in favor of this amazing deal at 50% of value. Because…. I know, that at some point in 2-3-4 years, I am going to make a TON OF MONEY for having taken advantage of that opportunity when it was presented to me… during this so called bear market.
Ok, I admit that during the “bear market” the building/investment got dinged up a bit and it’s not at peak performance (AIG has sub-par ROE at the moment, but it’s getting there). And I bought it right and I have time to make a few fixes. And in 2-3-4 years (from the date of my purchase 2 years ago) it will be doing just fine again.
Here’s a conservative back of the envelope investment thesis. It’s not much more difficult than this: Buying at 50% of Book Value, with Book increasing 10% per year (5% through earnings + 5% through discount buybacks) and exiting in 3 years at 100% of Book Value is 38% per year.
I forgot… was that a bear market someone was worried about? Or was it an invitation to a Sale?
For the record, I’m a big fan of Ray Dalio’s radical Truth stuff. I didn’t think he needed to make the Truth Manifesto so long, but he’s Ray Dalio, I guess (Did he write it when he was Ray Dalio?). He should re-write a shorter version, IMO. It’s really excellent stuff for investing, and for life. I have no idea how he sustains above market returns with such huge capital. Value Investing is part of my DNA… I can’t do it any other way.